Leverage, Key Performance Indicator?

June 16, 2021

U.S. Large Caps

Leverage is a measure of how much debt a company employs in their capital structure. Responsible use of debt can help companies grow while an overly heavy debt burden may lead to deteriorating financial health and performance. Using Net Debt to EBITDA (Earnings Before Interest Taxes Depreciation and Amortizations), companies with a lower ratio would have lower leverage, while companies with a higher ratio are less likely to be able to handle their debt burden.

The relationship between lower leverage and stronger performance tends to persist in most sectors. The companies with lower leverage in 10 out of 11 S&P 500 sectors generated higher 5 year annualized returns on average than those with higher leverage.

S&P 500 companies with lower leverage have outperformed by over 6% on average compared to those with higher leverage.

Source: Bloomberg Finance L.P., data as of 03/31/2021.
Past performance does not guarantee future results. The referenced index is shown for general market comparisons and is not meant to represent the O’Shares Funds. Investors cannot directly invest in an index.


Net Debt to EBITDA: Computes the company’s ability to pay off its debt by utilizing the earnings before interest, taxes, depreciation and amortization (EBITDA). Calculated as Net Debt/Trailing 12M EBITDA.

Growth: Represented by S&P 500 Growth Index. The S&P 500 Growth Index is a market capitalization weighted index. All the stocks in the underlying parent index are allocated into value or growth. Stocks that do not have pure value or pure Growth characteristics have their market caps distributed between the value & growth indices.

Higher Leverage: Defined as companies with a Net Debt to EBITDA Ratio that are in the top half of their sector.

Leverage: An investment strategy of using borrowed money – specifically, the use of various financial instruments or borrowed capital – to increase the potential return of an investment.

Lower Leverage: Defined as companies with a Net Debt to EBITDA Ratio that are in the bottom half of their sector.

S&P 500: Represented by S&P 500 Index. The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

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